Q1 2018 Rocky Mountain Chocolate Factory Inc Earnings Call

Jul 06, 2017 AM EDT
RMCF - Rocky Mountain Chocolate Factory Inc
Q1 2018 Rocky Mountain Chocolate Factory Inc Earnings Call
Jul 06, 2017 / 08:15PM GMT 

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Corporate Participants
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   *  Bryan J. Merryman
      Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director

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Conference Call Participants
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   *  Timothy Colin Call
      The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group

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Presentation
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Operator   [1]
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 Hello, and welcome to Rocky Mountain Chocolate Factory First Quarter Fiscal Year 2018 Conference Call. (Operator Instructions) Please note this event is being recorded.

 The statements made on this conference call which are not historical fact are forward-looking statements based upon the company's current plan and strategies and reflect the company's current assessment of the risks and uncertainties related to its business, including such things as product demand and market acceptance, the economic and business environment and the impact of government pressures, currency risks, capacity, efficiency and supply constraints and other risks detailed in the company's press releases, shareholder communication and Securities and Exchange Commission filings. For additional information, the company urges you to consider reviewing its 10-Q and 10-K SEC filings.

 I would now like to turn the conference over to Bryan Merryman, the company's Chief Operating Officer. Please go ahead, sir.

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 Bryan J. Merryman,  Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director   [2]
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 Thank you, operator. I'm Bryan Merryman, Chief Operating Officer of Rocky Mountain Chocolate Factory. Thank you for attending our first quarter of fiscal 2018 conference call to discuss our operating results. Mr. Frank Crail, President and CEO of Rocky Mountain Chocolate Factory, couldn't attend today's meeting due to a family commitment.

 With that, I'll begin discussing our operating results for the first quarter.

 Total revenue decreased 0.3%. Factory revenues increased 7.3%, driven primarily by a 17.6% increase in shipments to customers outside of our network of franchised stores and a 1.3% increase in same-store pounds purchased by franchisees and licensees, partially offset by a decline of 2.1% in the average number of domestic Rocky Mountain Chocolate Factory franchised stores into operations.

 Retail sales decreased 19%. This is the result of the sale and closure of certain company-owned stores and cafés in the previous fiscal year.

 Same-store sales at all company-owned stores and cafés decreased 6%. Royalty and marketing fees were up 15.8% due to a 15.8% decrease in domestic franchised units in operation due almost entirely to frozen yogurt café closures. Same-store sales at domestic Rocky Mountain Chocolate Factory franchised stores decreased 1.4%, while our same-store sales at domestic U-Swirl franchised cafés declined 8.6%. Total same-store domestic franchise sales across all brand decreased 3.9%.

 Franchise fees increased 136.1%. This was the result of international license fees received for the licensing rights covering Vietnam and Panama, partially offset by a decline in domestic franchise openings.

 Factory margins increased 80 basis points from 23.9% to 24.7%. This was driven by a decrease in the cost of certain commodities, primarily chocolate and almonds, partially offset by increased labor and overhead expenses.

 Excluding retail operating expenses, operating expenses decreased 7%. Adjusted EBITDA came in at $1,749,000 versus $1,736,000 last year. Net income was $814,000 for the quarter versus $732,000 for the same quarter last year.

 Diluted earnings per share increased 16.7% to $0.14 in the current year compared to $0.12 in the prior year. No stores were opened during the quarter, however, we have 19 stores that are sold but not opened this year versus 8 stores last year. Again, we executed international license agreements covering Vietnam and Panama. We finished the quarter with approximately $7.6 million in cash with a current ratio of 1.8:1. And on June 16, 2017, the company paid its 56th consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share.

 With that, I'll turn it back over to the operator for questions and answers.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) And we have a question from Tim Call of The Capital Management Corporation.

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 Timothy Colin Call,  The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group   [2]
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 When you look at your factory sales being stronger in the quarter, are there any new products or new retail relationships that provided that strength? And do you expect any of that to continue in the future?

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 Bryan J. Merryman,  Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director   [3]
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 Mainly, what was primarily driving increased sales was a 17.6% increase from that single customer. And more in line with the previous, not last fiscal year but the year before's quarter, back up more to a level that they were 2 quarters ago in the first quarter. We do expect that to continue for the balance of the year. We expect growth with that customer. We also saw some positive same-store pounds purchased from our franchise system and saw a 2.4% increase in sales to our franchisees and licensees and have no reason to believe that, that wouldn't continue.

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 Timothy Colin Call,  The Capital Management Corporation - President, CIO, and Chairman of the Investment Policy Group   [4]
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 When looking at your strong cash flow, it's been used to reinvest in the business with factory improvements and efficiencies. And that -- you might be done with that project over the next year. And then you've used a lot of your free cash flow to pay down debt, so interest expense is falling by over 20% year-over-year. And eventually you're going to run out of debt to pay down. Where do you see your uses of cash flow in future years?

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 Bryan J. Merryman,  Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director   [5]
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 If the company continues to grow at a fairly modest rate as it has in the past, then I would imagine we would start considering dividend increases as well as share buybacks. Right now, we have some litigation going that we're reserving some cash for even though we think it's not probable that we'll lose. And we also have another year of healthy capital expenditures playing in the factory. So I think if the business performs over the next couple of quarters like it did in the first quarter here, we would begin to entertain a dividend increase. I think the company is in, from a cash standpoint, in great shape, given every contingency that we know that's out there right now. And I think this litigation will be over by the end of September. So heading into the fourth quarter of this year, we'll have a better understanding where our cash position is and what we want to do in this fiscal year.

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Operator   [6]
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 (Operator Instructions) And in seeing no additional questions, we will conclude the question-and-answer session. I would like to turn the conference back over to Bryan Merryman for his closing remarks.

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 Bryan J. Merryman,  Rocky Mountain Chocolate Factory, Inc. - COO, CFO Treasurer & Director   [7]
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 Just want to thank everyone, again, for attending the call today. And we look forward to having our next call in 3 months. And have a great summer, everyone. Thank you.

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Operator   [8]
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 Ladies and gentlemen, this concludes our conference call for today. Thank you very much for attending today's presentation. To access the digital replay of this conference, you may dial 1 (877) 344-7529 or 1 (412) 317- 0088 beginning in approximately 1 hour. You will be prompted to enter a conference number, which will be 10109639. Please record your name and company when joining. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.




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